PG&E exit plan means negotiations begin in earnest

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Bankrupt California utility PG&E has proposed capping wildfire liabilities for both victims and insurers at $18 billion, a number substantially lower than the $30 billion in liability costs it estimated when entering bankruptcy.

The figures are included in the proposed Chapter 11 reorganization plan PG&E filed Monday in the U.S. Bankruptcy Court’s northern California district in San Francisco, a milestone that starts the process in earnest toward the investor-owned utility's goal of exiting bankruptcy by June 2020.

“It would be safe to assume that this won’t be the plan that is adopted, but it provides something to bargain around,” said Jared Ellias, a UC Hastings law professor who has been tracking the bankruptcy.

"My sense in talking to people around the Bay Area is that people are angry at how low the number is, because they or their loved ones were looking forward to PG&E giving them large checks for the damage suffered through the wildfires," Ellias said.

Ellias said he wonders whether PG&E is trying to set the number at a lower bar since a settlement figure has not been agreed upon. That move could backfire on the company, when it attempts to get the stalled Assembly Bill 235 restarted in January. The measure that would provide access for utilities to issue bonds through a state conduit to achieve lower interest rates.

Under PG&E's reorganization proposal, it would establish two trust funds, one capped at $8.4 billion to pay wildfire victims and the other capped at $8.5 billion for insurers who had to pay out claims. Local governments that have already settled with PG&E would receive $1 billion.

The plan involves raising debt and equity to cover the billions in liabilities PG&E faces from 2017 and 2018 blazes sparked by its equipment.

PG&E is being held accountable for causing several major fires, most notably the deadly Camp Fire.

The California Department of Forestry and Fire Protection announced in May that PG&E equipment ignited the fire on Nov. 8, 2018. That fire killed 85 people, destroyed 19,000 homes, businesses and buildings, and destroyed the town of Paradise.

The company proposed raising $14 billion by selling stock and has a $1.5 billion contribution from funds led by Knighthead Capital Management. Several of the nation’s largest banks including Barclays Plc and Goldman Sachs Group Inc. expressed confidence in letters included in the plan that $30 billion in debt and equity could be raised.

Ellias described the filing as a “press release” for Sacramento politicians and investors, saying look “we are making progress,” because the 135-page document did not include the typical disclosure summarizing the plan that makes it easy for creditors to vote.

U.S. Bankruptcy Judge Dennis Montali in San Francisco must approve the plan, but first it would go to a vote of creditors.

It’s not unusual for a reorganization plan to be amended several times during a bankruptcy with at least one or two versions that involve significant changes to the deal, Ellias said.

Hitting that June deadline “feels aggressive given how much work needs to be done,” Ellias said. “They do have great lawyers working for them, and if anyone can get it done, they can, but a lot needs to happen between now and June.”

The company lined up $5.5 billion to fund operations during what it estimated as a “two-year” bankruptcy process in January, including a $3.5 billion revolving credit facility through four banks. So, the new timeline appears faster than what was initially anticipated.

PG&E has to hit that June deadline in order to participate in the state’s $21 billion wildfire fund created by Assembly Bill 504 that California Gov. Gavin Newsom signed in July.

The law extends a utility bill surcharge enacted to back bonds issued after the 2000 California electricity crisis. The surcharge is being extended to back $10.5 billion in Department of Water Resources bonds that will be issued to create the fund. The utilities would match the $10.5 billion provided by the state. The fund would act as a line of credit for utilities to cover future wildfire damages.

PG&E included provisions in the plan to contribute $4.8 billion initially and a $193 million initial annual contribution.

In the filing, PG&E wrote it still holds hope of gaining legislative approval early next year to sell $20 billion in Wildfire Victim Recovery Bonds. The legislation to authorize the bonds, AB 235 by Republican Assemblyman Chad Mayes of Yucca Valley, stalled in committee on Friday, rendering it dead for this year's session of the Legislature. Mayes plans to take the issue up again in January.

The idea is to provide a pathway for investor-owned utilities facing heavy fire liabilities, who have seen their ratings tank, to issue bonds through the California Infrastructure and Economic Development Bank at the lower interest rates possible because of the state's double-A ratings.

All three rating agencies dropped PG&E's ratings to junk after it announced in January that it planned to file for bankruptcy in the face of its wildfire liabilities.

PG&E would be on the hook for the bonds, not ratepayers or taxpayers, according to Mayes.

If PG&E could get the legislation approved, it would sell the bonds “into the most favorable market in a decade for the syndication of wildfire risk,” said Matt Fabian, a partner with Municipal Market Analytics. “If there are bonds, there would be buyers.”

The high-yield, risk-aggressive demand side is as strong as it’s been in years, Fabian said.

“Investors want to buy risk, and issuers should be willing to sell it,” he said.

Ellias wouldn’t venture a guess as to whether the recovery bond legislation will be approved next year, but said the fact that the shareholders and bondholders came out lobbying on different sides of the legislation speaks to the uniqueness of the bankruptcy.

“Normally what the debtor does is threaten to scorch the earth, and then tells the judge it needs to do all these things or the company would die,” Ellias said. “But there is no way this company will die. They haven’t been making big public threats. They have been saying we need to vet the claims of the wildfire victims, but in a different bankruptcy where the debtor was looking at a big personal claim, they would be arguing it is baseless. PG&E hasn’t been making those threats, because they are so sensitive to public relations.”

On Friday, San Francisco’s Mayor London Breed and City Attorney Dennis Herrera sent a letter to the company offering to buy its San Francisco assets for $2.5 billion. The money would come from selling revenue bonds through the San Francisco Public Utilities Commission using bond authority from Proposition A, a bond measure approved by voters in June 2018.

John Cote, a spokesman in the city attorney's office, said issuing the bonds to buy PG&E's San Francisco assets would be an appropriate use of that bond authority, though PG&E didn't enter bankruptcy until six months after the bond measure passed.

"We and our outside bond counsel Orrick, Herrington & Sutcliffe are confident that the SFPUC has the legal authority to issue revenue bonds to finance the acquisition outlined in our offer letter," Cote said. "Proposition A gives the SFPUC full authority to issue revenue bonds for power enterprise purposes, including PG&E distribution assets, subject to approval by the Board of Supervisors. The fact that PG&E declared bankruptcy after the measure passed does not matter."

Breed and Herrera said in the letter that the deal would provide the utility with a “significant cash infusion.” In a separate statement, Breed called the offer competitive, fair and equitable.

San Francisco has been weighing the possibility of taking over the assets ever since PG&E filed bankruptcy in January.

The company declined the offer, saying in a statement that it didn’t believe the sale would be in the best interest of its customers and stakeholders, but that it is willing to discuss the issue with the city.

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Bankruptcy Natural disasters Utilities Revenue bonds California Department of Water Resources California